Market

Stocks edge back to kick off earnings week as Powell says U.S. economy at ‘inflection point’

U.S. stocks traded modestly lower Monday at the start of a week that will see the unofficial start of first-quarter earnings, headlined by some of the nation’s largest banks, including JPMorgan Chase & Co.
JPM,
+0.02%

and Goldman Sachs Group
GS,
+0.35%
.

Market participants were also weighing comments from Federal Reserve Chairman Jerome Powell, who spoke during a “60 Minutes” interview that aired on Sunday.

How are stock benchmarks performing?

On Friday, the S&P 500 booked a 2.7% weekly gain, the Dow rose 2%, and the Nasdaq Composite logged a 3.1% weekly rise. The S&P 500 and the Dow booked their third straight weekly gain, while the Nasdaq has climbed for two weeks in a row.

What’s driving the market?

On Sunday, Powell said that the economy is going to start growing strongly in the second half of the year, but emphasized that that rebound shouldn’t lead anyone to believe that the central bank would dial up interest rates in 2021.

“I think it’s unlikely that we would raise rates anything like this year,” Powell said during the “60 minutes” interview which was taped at the Fed’s headquarters on Wednesday and aired Sunday evening.

Read: Wall Street comes to grips with a Fed that will do what it says

The Fed chief said the economy “seems to be at an inflection point,” with strong growth coming “right now” and the weakness caused by the coronavirus pandemic in the rearview mirror.

Powell’s comments come as Wall Street is positioning for the start of first-quarter corporate results, which could offer further clues about whether one of the market’s biggest fears is coming to fruition: a too-hot economy and surge in inflation that compels policy makers to substantially raise rates and dial back accommodative policies sooner than expected.

So far, Fed officials have said they expect a rise in inflation to be transitory and have repeatedly stated that they would be focused on ensuring that the labor market makes a full recovery before considering easing policy.

As earnings season kicks off, “I’m waiting to see how the market reacts,” said Keith Lerner, chief market strategist for Truist Advisory Services. “A lot has been priced in and the market is looking for earnings to confirm that that’s the correct move. The hurdle rate for positive surprises has moved up.”

Lerner thinks the Fed will remain “supportive” and even if bond yields rise, the market should absorb the next leg higher as long as it isn’t too steep.  

 “We’ve had a very gradual, but steady, low-volatility move to new highs,” Lerner said in an interview. “I still think the primary market trend is higher, but as we head into earnings, I suspect we start trading a little more rangebound. When the primary trend is higher, you don’t want to worry about the hiccups.”

Some strategists fear, however, that stock valuations remain elevated despite uncertainties that include inflation and the tax regime.

Stocks mostly ended at records last week and the Nasdaq Composite, after falling into correction in March—defined as a drop of at least 10% from a recent peak—stands less than 2% from its Feb. 12 all-time closing high. Gains for equity benchmarks have come despite concerns about out-of-control inflation and the possibility that President Joe Biden will raise the corporate tax rate to 28% from 21% to help fund his $2.4 trillion infrastructure proposal.

“The investment community is too upbeat in our opinion, not showing any concern for plausible tax increases being proposed by the Biden administration,” wrote Citigroup research analysts, Tobias Levkovich, Lorraine Schmitt and Jennifer Stahmer, in a research note dated April 7.

“Indeed, all developments are perceived as positive news. Yet, such one-sided views are not usually a good starting point,” the Citi researchers wrote.

Meanwhile, Germany was preparing new COVID-inspired legislation which would enable the eurozone’s largest economy to impose national restrictions without regional government approval. England, meanwhile, reopened pubs for outdoor drinking, and hairdressers.

See: The biggest ‘inflation scare’ in 40 years is coming—what stock-market investors need to know

Which companies are in focus?
  • Shares of Nuance Communications
    NUAN,
    +16.16%

    surged more than 17% Monday after Microsoft Corp.
    MSFT,
    +0.57%

    confirmed it would buy the artificial-intelligence company for about $16 billion.

  • Regeneron Pharmaceuticals
    REGN,
    -0.58%

    said Monday that it would ask the Food and Drug Administration to expand the use of its antibody drug among people exposed to the virus who haven’t yet been vaccinated, suggesting potential new preventive applications for the drug, which is already in use to treat COVID-19 cases. Shares fell 0.3%.

  • Uber Technologies Inc.
    UBER,
    +3.88%

    shares were 3.8% higher after the company said Monday morning that overall gross bookings reached their highest monthly level in the company’s history in March.

  • Shares of Ingersoll-Rand Inc.
    IR,
    -0.29%

     lost 0.4% midday Monday, after the diversified industrial company announced a deal to sell Club Car for about $1.7 billion.

How are other assets faring?
  • The ICE U.S. Dollar Index,
    DXY,
    -0.10%

    a measure of the currency against a basket of six major rivals, was down 0.1% at 92.11.

  • U.S. crude
    CL.1,
    +0.56%

    for May delivery
    CLK21,
    +0.56%

    gained 60 cents or 1%, to trade near $59.92 a barrel on the New York Mercantile Exchange, after losing 3% last week.

  • The 10-year Treasury note yield
    TMUBMUSD10Y,
    1.671%

     gained nearly 2 basis points to trade near 1.678% ahead of a busy week for the bond market. Bond prices move inversely to yields.

  • Gold futures ticked down, with the June contract
    GCM21,
    -0.70%

     $10.20 or 0.6% lower, to $1,734.60 an ounce on Comex.

  • In Europe, the Stoxx 600 index
    SXXP,
    -0.46%

    closed 0.4% lower, while London’s FTSE 100
    UKX,
    -0.39%

     ended 0.3%.

  • In Asia, the Shanghai Composite SHCOMP finished 1.1% lower, Hong Kong’s Hang Seng HSI closed down 0.9%, and Japan’s Nikkei 225 NIK lost 0.8%.

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